The Bank of England’s December dashboard

With the UK set to leave the EU smoothly in January, averting a chaotic 'no deal' exit, it's tempting to assume that investment will rebound in 2020 after two years of modest decline. That may be true to some extent, but there are five reasons why we may not see a sizable turnaround:

1. The persistent lack of new orders and the resulting dip in capacity utilisation across the economy suggests little immediate impetus to expand.
2. In the goods sector – the stockpiling process ahead of the 2019 Brexit deadlines will have been costly, and we suspect in some cases it will have been tricky to shift the extra inventory amid fewer new orders. All of this is expensive, drawing resources away from investment.
3. Without an extension to the transition beyond December 2020, firms are again at a risk of an abrupt single market/customs union exit at the start of 2021. The 11-month standstill period is unlikely to be long enough to both negotiate and implement a trade deal with the EU. An extension is likely, but until there's clarity (which may not come until June), investment may be kept under some pressure.
4. While a longer transition would be positive, it does mean that it could be some time until there's clarity on the sector-specific ramifications of the UK's future EU trading relationship. The jury is still out on whether the Johnson administration will stick to a fairly limited free-trade agreement, or whether it will pivot to something 'softer' with half an eye on the 2024 election. Until we know more, firms may remain wary about making significant, longer-term investment decisions.
5. Global growth is set for another disappointing year. While the agreement of a phase-one trade deal is positive, the risks related to protectionism are here to stay and we're expecting sub-consensus growth in both the US and Eurozone in 2020.

Cracks are forming in the UK jobs market, and this was a key reason why two MPC members voters for a rate cut at the last meeting. And with the growth numbers so volatile over recent months, our sense is that the Bank as a whole will be placing greater emphasis on jobs data over the next few months.

Forward-looking indicators of hiring appetite have been deteriorating over recent months. The number of vacancies has consistently fallen this year, while some of the recent PMIs have hinted at non-replacement of staff and in some cases redundancies. We have also seen employment fall in the official data, although this seems to be almost solely attributable to young and part-time workers, both fairly volatile parts of the jobs data. Once 18-24 year-olds are removed, employment growth is still just about positive.

In other words it's still early days, but the risk is that the ongoing weakness in investment also hits hiring demand further. At the very least, the Bank of England will want more time to see how this story pans out.

A deteriorating jobs market would be bad news for consumer spending, which has been surprisingly stable through the twists-and-turns of Brexit during 2019. The Bank of England is already penciling in a slower pace of wage growth next year, although it's worth remembering that structural skill shortages (exacerbated by demographic factors and a slowdown in EU immigration) are likely to keep some upward pressure on pay even if cyclical forces become more muted.